Michael Lewis has a new article in the latest Vanity Fair on AIG Financial Products. It's titled, The Man Who Crashed the World, and it's nominally about former AIGFP chief Joe Cassano, but it's really about AIGFP in general. (Cassano plays a big role in AIGFP's story, of course.) The full article isn't available on Vanity Fair's website—they only offer a limited summary—but I have a pdf version of the full article that I'm embedding below (if I can figure out how to do it).
The article is excellent—it's really Lewis at his best. The media narrative of AIG's downfall was established many months ago. And yet, incredibly, Lewis is apparently the first journalist who actually went to AIGFP's offices and interviewed their traders about what really happened. As Lewis notes:

Here is an amazing fact: nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that, without the intervention of the government, would have led to the bankruptcy of every major American financial institution, plus a lot of foreign ones, too, A.I.G.'s losses and the trades that led to them still haven't been properly explained.

The real story is much less sensational, and much more nuanced, than the accepted media narrative. Shocking, I know. Also, for what it's worth, Lewis's account is consistent with everything I've heard about the AIGFP trades too.
We also learn the story of Jake DeSantis's infamous resignation letter that was published on the New York Times op-ed page. Lewis, who was involved, calls DeSantis "incredibly brave. He stepped out alone in front of a mob and compelled it to disband, at least for the moment."
Anyway, read the whole thing.
vf article

"In the weeks after the government rescue, dozens of McKinsey & Co. consultants hired by the Fed swarmed AIGFP’s headquarters in Wilton, Connecticut. After Pasciucco arrived, they worked with him and FP employees to sort the subsidiary into 22 component businesses, most of them involving derivatives.

What brought the company down, Pasciucco says, was its exposure to fewer than 200 insurance contracts that were sensitive to AIG’s credit ratings and the value of the underlying CDOs.

Pasciucco’s job is to extricate AIG from tens of thousands of derivatives contracts, or trades, entered into by what amounted to a hedge fund within the insurance company -- one whose managers worked independently and took home 30 percent of the profits. No winding down on this scale has ever been attempted. The effort that comes closest may be the dismantling of hedge fund Long-Term Capital Management LP, which in 1998 lost more than 90 percent of its value amid the Russian bond default. "

And:

"Pasciucco’s first goal when he took over AIGFP was to exit the riskiest trades. He points to the portfolio’s gross vega, a measure of risk that in its simplest application gauges the dollar impact of an increase in volatility. Vega, Pasciucco explains, was down 38 percent as of May 12, to $770 million from $1.25 billion.

“The risk in the book is down far more than the trade count,” he says. “That’s because the trades we’re unwinding have been the riskier trades.”

Some of the most treacherous deals are also the longest dated. In the first quarter, the number of trades lasting more than 50 years was cut to 11 from 67. Pasciucco notes that his predecessors didn’t shy away from complicated derivatives.

“They were often combining commodity risk with equity risk and with puts and calls,” he says. “They were very comfortable with complexity."

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About Me

I'm a finance lawyer in New York. I used to focus on derivatives and structured finance (you know, back when there was a structured finance market). I spent the majority of my career at one of the major investment banks. My background is in economics and, unfortunately, politics.

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